Setting Up in GIFT City IFSC 2026: Approvals, Tax, FEMA and Compliance

Summary:The article explains the regulatory, tax, FEMA and compliance framework for setting up a unit in GIFT City IFSC in 2026. It states that an IFSC unit is treated as a person resident outside India for FEMA purposes while remaining an Indian company under the Companies Act and an Indian assessee under income tax law. It outlines the approval process involving SEZ approval and IFSCA registration through the SWIT portal, incorporation options, setup stages, recurring compliance requirements and account structures. The article highlights 2026 developments, including the Finance Act 2026 extending the IFSC tax deduction period and relocating the provision to Section 147 of the Income-tax Act, 2025, RBI changes relating to SNRR accounts, foreign currency accounts and FLA reporting, the draft Foreign Investment Rules, 2026, and the Corporate Laws (Amendment) Bill, 2026 proposing an IFSC-specific LLP framework. It also discusses GST and FEMA treatment, tax conditions, the limited IFSC-specific judicial precedent, common setup mistakes, and compares GIFT City with Singapore and Dubai for India-linked financial services activities.

Brief

GIFT City is inside India geographically and outside it for most of the law that matters. That single fiction — a unit in an International Financial Services Centre is a person resident outside India for FEMA purposes — drives the approvals, the accounts, the reporting and most of the confusion. 2026 has changed the file substantially: the Finance Act 2026 doubled the tax holiday and moved it into a new section of a new Act, the RBI opened SNRR accounts to IFSC transactions and issued its first real guidance on FLA reporting for GIFT structures, draft rules to replace the NDI Rules are out for comment, and the Corporate Laws (Amendment) Bill, 2026 proposes an IFSC-specific LLP. This article sets out the setup path, the regulator map, the tax and FEMA position as it now stands, and — honestly — the near-total absence of IFSC-specific case law.

1. Start with the fiction, not the brochure

Almost every avoidable error in a GIFT City engagement traces back to one misunderstanding, and it is worth stating before anything else. For the purposes of the Foreign Exchange Management Act, 1999, a unit in an International Financial Services Centre is treated as a person resident outside India, notwithstanding that the unit sits in Gandhinagar and is registered with the Registrar of Companies, Ahmedabad. It is an Indian company under the Companies Act. It is a non-resident under FEMA. It is an Indian assessee under the income tax law, taxable in India, drawing a deduction rather than an exemption.

Hold those three characterisations apart and the framework becomes tractable. Collapse them — as a great deal of promotional material does — and you get the two questions that arrive in practice most often: whether a resident individual’s GIFT City holding is a foreign asset to be reported in Schedule FA, and whether money moving from a Delhi parent to its GIFT subsidiary is a domestic transfer. Neither has a one-line answer, and the reason is that the entity is wearing different hats under different statutes.

The second thing to say early is that GIFT IFSC is not a general-purpose low-tax address. The deduction is activity-linked, not location-linked. It is available to units carrying on financial services activities notified for the purpose and licensed by the International Financial Services Centres Authority — banking units, finance companies, fund management entities, insurance offices, aircraft and ship lessors, bullion market participants, capital market intermediaries, global in-house centres. A trading company or a software exporter cannot relocate to GIFT City and claim the holiday. Firms that discover this after paying for office space are not rare.

What follows assumes a client who has cleared that threshold and now needs the file built.

2. Who approves what

There are two approvals, and they are frequently conflated. The SEZ approval makes you a unit in a Special Economic Zone and confers the SEZ benefits, including duty-free procurement and zero-rated supplies from the domestic tariff area. The IFSCA registration or licence permits you to carry on the regulated financial activity. Both are required, they run through the same portal, and the SEZ Letter of Approval is generally a condition precedent to the IFSCA registration taking effect.

The administrative structure changed in 2024 and much published material has not caught up. The powers of the Development Commissioner in relation to GIFT-SEZ were vested in the Administrator (IFSCA), so the SEZ-side approvals for an IFSC unit come from IFSCA wearing its Administrator hat rather than from a separate Development Commissioner’s office. IFSCA therefore appears twice in the process — once as SEZ Administrator and again as the financial-sector regulator through its sectoral divisions.

Table 1 — The regulator map. Note that IFSCA occupies two distinct roles and issues two distinct approvals.

On the question that comes up in every second call — no, separate RBI approval is not ordinarily required once IFSCA has licensed the entity. RBI’s role is exercised through the FEMA rules and regulations that govern how money moves, not through a transaction-by-transaction clearance. That does not make FEMA irrelevant; it makes it structural rather than procedural.

3. The setup path, stage by stage

STAGE 1   Provisional Letter of Allotment from a GIFT SEZ developer

(office space — co-working or dedicated). 2–4 weeks.

↓

STAGE 2   Incorporate the entity with its registered office at the

GIFT City address — company via SPICe+, LLP via FiLLiP,

or a branch of a foreign company. 1–2 weeks.

↓

STAGE 3   Common Application Form on the SWIT portal — one filing

carrying both the IFSCA application and, in Section D,

the SEZ Letter of Approval application.

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STAGE 4   IFSCA sectoral scrutiny + Unit Approval Committee meeting

↓

STAGE 5   Letter of Approval from the Administrator (IFSCA);

IFSCA in-principle / final registration

↓

STAGE 6   Lease deed with the developer; Bond-cum-LUT executed

with customs for duty-free procurement against the LOA

↓

STAGE 7   Foreign currency account with an IFSC Banking Unit; SNRR

account where rupee transactions outside the IFSC are

needed; GST registration; SEZ ID cards for staff

↓

STAGE 8   Commencement of business intimation; recurring reporting

begins from the first month

Two mechanical points about SWIT save time. First, although the LOA application is initiated through SWIT, the processing happens in the SEZ Online system — SWIT hands off and the applicant tracks it there. Second, a small number of activities requiring IFSCA approval are not yet enabled on SWIT; for those, the SEZ application is filed directly in SEZ Online in the prescribed form. IFSCA’s public notice on the SWIT portal lists which activities fall outside. Filing in the wrong place is a fortnight lost.

One more sequencing point, on the indirect tax side, because it is routinely garbled. The Bond-cum-LUT the unit executes is a customs instrument under the SEZ Rules, covering duty-free import and procurement against the Letter of Approval. It is a different document from the GST Letter of Undertaking. Under Section 16 of the IGST Act, 2017 a supply of goods or services from the domestic tariff area to an SEZ unit for authorised operations is a zero-rated supply, and since 1 October 2023 it has to be made without payment of integrated tax under bond or LUT — furnished by the supplier, not by the unit. Where the unit itself is the person liable under reverse charge, the position is that it may procure without paying integrated tax if it furnishes its own LUT, which is where the Bond-cum-LUT and the GST LUT get confused. Procurements of services from the DTA are also reported through the DTA Services Procurement Form on the SEZ Online portal.

The direction of the supply matters just as much. Services supplied by the unit to a person outside India are exports and zero-rated. Services supplied by the unit into the domestic tariff area are an inter-State supply on which the unit pays IGST; goods moving the same way are treated as an import by the DTA recipient, who bears customs duty and IGST. “No GST in GIFT City” is true only of the offshore-facing side of the business.

On timelines, be careful what you promise. Incorporation is predictable; the regulatory stage is not. The Unit Approval Committee meets periodically, and a proposal that misses a meeting waits for the next one. A well-prepared application for a straightforward activity can move from Provisional Letter of Allotment to Letter of Approval in eight to twelve weeks; a fund management entity with net worth and key-personnel conditions to satisfy, or a promoter group that raises fit-and-proper questions, takes materially longer. The published “set up in 30 days” claims describe the incorporation, not the licence.

4. Company, branch or LLP

A foreign company can set up in GIFT City directly, and both routes are used. A branch of the foreign parent avoids a separate corporate layer and keeps the balance sheet consolidated, but it exposes the parent and complicates the tax computation. A subsidiary — a company incorporated in India with its registered office in the IFSC — is the more common structure, and 100% foreign ownership is available for the financial services activities permitted in the IFSC.

The LLP is where 2026 is about to matter. An LLP can be incorporated in GIFT City today, but the LLP Act, 2008 was not written with an offshore financial centre in mind — contributions are in rupees, the objects clause has to be squeezed into a general “business” formulation, and the mismatch has made the LLP an awkward vehicle for alternative investment funds. The Corporate Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 23 March 2026 and referred to a Joint Parliamentary Committee, proposes a purpose-built answer.

• New definitions in Section 2 of the LLP Act — “International Financial Services Centre”, “International Financial Services Centres Authority”, “permitted foreign currency” and “Specified International Financial Services Centre LLP”.
• A new proviso to clause (c) of Section 11(2) letting a Specified IFSC LLP state its objects as financial services activities permitted under the IFSCA Act, 2019 — which removes the objects-clause problem at the root.
• Registered office required to remain within the IFSC at all times, and the suffix “International Financial Services Centre LLP” in the name.
• Partner contributions to be accounted for in a permitted foreign currency, with a transition window for existing IFSC LLPs to convert out of rupees and a bar on accepting new rupee contributions after commencement; books and financial statements likewise in that currency, subject to any exception the IFSC Authority permits.
• A proposed Section 57A read with the Fifth Schedule allowing a “specified trust” registered with SEBI or the IFSC Authority to convert into an LLP, with consent of 75% of investors and the trustees becoming the partners — aimed squarely at AIFs structured as trusts.

None of this is law. The Bill is before the Joint Committee, which has been conducting a clause-by-clause examination, and its provisions will come into force on dates to be notified after enactment. A client structuring today has to work with the LLP Act as it stands, while modelling contributions in the intended foreign currency so that a later conversion is not disruptive.

5. Tax: the section number changed, and so did the arithmetic

This is the part of the file most likely to be stated wrongly in 2026, because two things moved at once.

First, the Income-tax Act, 2025 took effect from 1 April 2026. The IFSC deduction that practitioners know as Section 80LA of the 1961 Act now sits in Section 147 of the 2025 Act. Citing “Section 80LA” in advice dated after April 2026 is not fatal, but it dates the advice.

Second, the Finance Act 2026, enacted in March 2026, substantially enlarged it. The deduction period was extended from ten consecutive years out of fifteen to twenty consecutive years out of twenty-five for units in an IFSC, and to twenty consecutive years for Offshore Banking Units. After the deduction period expires, business income of the unit is taxed at a concessional 15%. The changes take effect from 1 April 2026.

There is a condition attached that deserves more attention than it has received. For any Offshore Banking Unit or other IFSC unit commencing operations on or after 1 April 2026, the deduction is available only if the unit is not formed by splitting up, or the reconstruction, reorganisation or transfer of a business already in existence in India. That language is not new to Indian tax law — it is the same formulation that has governed Sections 10A, 10AA and their predecessors for decades. Its arrival in the IFSC provision means that a group moving an existing Indian treasury desk or lending book into a GIFT City unit now has a substantive eligibility question to answer, not merely a procedural one.

Table 2 — The tax holiday before and after the Finance Act 2026. Figures should be confirmed against the bare provision for the specific activity, which is licence-dependent.

Three further points belong in any tax note on a GIFT City structure. The deduction is computed at the unit level and requires the income to be derived from the eligible business — income that falls outside the licensed activity does not shelter. The Section 9A safe harbour for offshore fund managers, whose sunset was extended to 31 March 2030, allows a GIFT City-based manager to make investment decisions for offshore vehicles without those vehicles acquiring an Indian tax presence, which is a structuring tool independent of the deduction. And transfer pricing applies with full force to dealings between the IFSC unit and its Indian group — a zero-tax unit transacting with a taxed affiliate is precisely the fact pattern the transfer pricing provisions exist for.

6. FEMA: what changed in the last twelve months

Because the IFSC unit is a person resident outside India for FEMA purposes, a transaction between a Delhi company and its GIFT City subsidiary is a cross-border transaction, and money moving from a resident into the IFSC is foreign investment. That is the starting point. Four developments have moved the position recently.

• Foreign currency accounts for exporters. By the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Seventh Amendment) Regulations, 2025, notified in October 2025, the RBI inserted a definition of IFSC aligned to the IFSCA Act, 2019 and substituted Regulation 5(CA) to let a resident exporter open and hold a foreign currency account with a bank outside India, including in an IFSC, for realising full export value and advance remittances. Funds may be used for import payments or repatriated within three months where the account is with a bank in an IFSC, against one month elsewhere — an explicit preference for IFSC banking units.
• SNRR accounts. The Foreign Exchange Management (Deposit) (Sixth Amendment) Regulations, 2026 widened the SNRR framework to bring IFSC transactions within it. Read with the earlier 2025 amendments, which allowed IFSC units to open SNRR accounts with authorised dealers outside the IFSC for business transactions conducted outside the IFSC, this closes a practical gap: a GIFT City unit that needs to pay an Indian vendor in rupees now has a sanctioned account structure rather than a workaround.
• FLA reporting. In July 2026 the RBI issued FAQs that, for the first time, address Foreign Liabilities and Assets reporting for IFSC structures directly. The short answer is that the reporting obligation follows the residence fiction: the IFSC entity itself answers to IFSCA, while Indian counterparties on either side of an IFSC investment retain their own FLA obligations to the RBI. Given that the FLA return is position-based — due by 15 July on the FLAIR portal wherever outstanding inward FDI or outward ODI exists at 31 March, whether or not anything happened during the year — this is a live compliance item for the Indian parent, not for the GIFT unit alone.
• Draft Foreign Investment Rules. On 21 July 2026 the RBI released the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, which would supersede the Non-Debt Instruments Rules, 2019 in their entirety. The draft shifts the structure from investor-centric to investee-centric, redraws the FDI and FPI threshold test, redefines ownership and control for a foreign-controlled entity, and codifies direct listing on international exchanges. Comments close on 31 August 2026. For anyone structuring an inbound investment into a GIFT City entity in the second half of 2026, the sensible course is to test the structure against both the existing Rules and the draft.

The practical instruction is to design the account architecture at the same time as the licence application, not after it. A unit that obtains its Letter of Approval and only then discovers it needs both a foreign currency account with an IFSC Banking Unit and an SNRR account outside the IFSC has added weeks to its commencement date.

7. The recurring compliance layer

This is where GIFT City surprises clients who were sold a low-tax jurisdiction. The compliance load is not light. It is three overlapping layers — SEZ, IFSCA sectoral, and ordinary Indian tax and corporate — and the SEZ layer is monthly.

Table 3 — The three layers. Missing the monthly SEZ filings is the most common default, because nothing prompts them.

Exit, and why the Letter of Approval conditions matter

An SEZ unit does not simply stop. Exit runs through the Administrator and requires the duty position to be settled — duty-free capital goods and inputs procured against the LOA have to be accounted for, with duty paid on what remains — the export or net foreign exchange position to be demonstrated for the period of operation, pending proceedings to be closed out, and the sectoral regulator’s clearance to surrender the licence. Only then does the final exit order issue. Failure to satisfy LOA conditions during the term does not usually produce an immediate penalty; it produces a problem at renewal and at exit, when the file is read as a whole. Clients who treat the LOA conditions as boilerplate discover them years later.

8. The case law gap, stated honestly

There is essentially no IFSC-specific judicial precedent. The IFSCA Act was passed in 2019 and the Authority became operational in 2020; the framework since has been built through regulations and circulars rather than litigation, and the tax holiday has not run long enough to generate assessment-stage disputes at appellate level. Any article presenting a list of “GIFT City case law” is either citing SEZ-era decisions without saying so, or padding.

That gap is itself the useful observation, because it tells you where the first disputes will come from. Three lines of settled jurisprudence are the closest analogues, and they should be read as principles likely to apply by analogy rather than as precedent on IFSC provisions.

• Splitting up and reconstruction. The condition inserted for units commencing on or after 1 April 2026 imports language with a long history. The leading authority remains the Supreme Court’s decision in Textile Machinery Corporation Ltd. v. CIT, CITATION:
  1977 AIR 1134 Dated: 25 January, 1977, which held that a new industrial undertaking is not a reconstruction of an existing business merely because it is set up by an existing concern using its resources, provided it is a genuinely new and separate undertaking capable of independent production. That reasoning will do a great deal of work when a bank or an NBFC moves a book into an IFSC unit.
• Eligible-activity characterisation. Section 10A and 10AA generated two decades of litigation on what qualifies as the eligible business and how the deduction is computed at undertaking level. The Supreme Court’s decision in CIT v. Yokogawa India Ltd., CIVIL APPEAL NO. 8498 OF 2013 Dated: 16 December, 2016 on unit-level computation is the best-known example. Section 147 is a differently framed provision, but the underlying question — is this income derived from the eligible business of this unit — is identical, and the first IFSC assessments will turn on it.
• Reverse charge on procurement by the unit. This is the closest thing to an IFSC-specific authority that exists, and it is not a judgment. The Tax Research Unit of the CBIC clarified, on a query concerning an SEZ unit in IFSC Gandhinagar procuring legal and sponsorship services from the domestic tariff area, that the unit may procure reverse-charge services without payment of integrated tax where it furnishes a Letter of Undertaking, the recipient being treated as the deemed supplier for the purpose. The Maharashtra Authority for Advance Ruling in Portescap India Private Limited went the other way on renting of immovable property from a zone authority. The point is not that the question is settled — it plainly is not — but that a GIFT City unit with meaningful DTA procurement should document its LUT position rather than assume the zone status answers it.
• FEMA contravention and compounding. The pre-IFSC jurisprudence on FEMA contraventions, particularly on account structures used without the correct authorisation and on delayed reporting, is directly relevant because the residence fiction multiplies the number of transactions that are cross-border. The compounding practice on delayed FLA and inbound reporting is the practical reference point rather than any reported IFSC decision.

The honest position to give a client is therefore this: the framework is generous and clearly drafted, and it is untested. That is a reason for documentation discipline, not for hesitation.

9. GIFT City against the alternatives

Table 4 — An orientation only. The comparison that decides a mandate is activity-specific, and headline tax rates rarely settle it.

The honest framing for a client weighing these is that GIFT City wins where the flows are India-linked — an India-focused fund, an Indian corporate’s treasury, aircraft leasing into Indian carriers, reinsurance of Indian risk. It does not yet win on ecosystem depth or on the settled predictability that a mature centre offers, and a business with no India nexus rarely has a reason to choose it.

10. Six mistakes worth avoiding

1. Assuming the deduction follows the address. It follows the licensed activity. Confirm eligibility against the notified activities before any money is spent on space.

2. Filing the SEZ application in the wrong place. Where the activity is enabled on SWIT, the Letter of Approval application must go through SWIT; only the listed exceptions go directly into SEZ Online. Processing then moves to SEZ Online regardless.

3. Treating the GIFT unit as domestic for FEMA. It is a person resident outside India for FEMA purposes, so funding it is foreign investment and paying an Indian vendor in rupees needs the right account structure.

4. Overlooking the monthly SEZ reporting. The Monthly Performance Report and the Service Exports Reporting Form are due every month from commencement and nothing prompts them.

5. Moving an existing Indian business into the unit without testing the splitting-up condition. For units commencing on or after 1 April 2026 this is an eligibility question, and the answer determines twenty years of deduction.

6. Quoting a setup timeline based on incorporation. Incorporation is the fast part. The Unit Approval Committee and the sectoral licence set the real date.

11. Conclusion

GIFT City in 2026 is a materially better proposition than it was two years ago, and the improvements are structural rather than promotional. A single application through SWIT now carries what used to be several. The Administrator and the sectoral regulator sit inside one authority. The tax holiday runs for twenty years rather than ten, with a defined 15% rate afterwards instead of a cliff. FEMA has stopped treating the IFSC as an afterthought — exporters can hold foreign currency accounts there on better terms than elsewhere, SNRR accounts now reach IFSC transactions, and the RBI has finally said something concrete about FLA reporting for these structures.

What has not changed is that the benefits are conditional and the compliance is monthly. The deduction attaches to a licensed activity carried on by a genuinely new unit, not to a Gandhinagar postal address. The Letter of Approval carries conditions that are read strictly at renewal and at exit. And the entire edifice is, for now, untested in court, which puts the burden on the file rather than on precedent.

For the professional advising on a GIFT City setup, the work sits at two ends. At the front, in an honest eligibility assessment before the client commits to space — the conversation that saves a wasted mandate. At the back, in a compliance calendar that someone actually owns from the first month of operation. The regulatory architecture in between is now, unusually for Indian financial regulation, the straightforward part.

References

• International Financial Services Centres Authority Act, 2019 — including Section 3(g).
• Special Economic Zones Act, 2005 and the SEZ Rules, 2006; Gazette notification of 2024 vesting the powers of the Development Commissioner in relation to GIFT-SEZ in the Administrator (IFSCA), and the IFSCA public notice on use of the SWIT portal.
• IFSCA circular on the Single Window IT System for registration and approvals from IFSCA, SEZ authorities, GSTN, RBI, SEBI and IRDAI (October 2024); IFSCA FAQs on SEZ compliances for IFSC units.
• Income-tax Act, 1961 — Sections 9A and 80LA; Income-tax Act, 2025 — Section 147, as amended by the Finance Act 2026 (assent 30 March 2026, effective 1 April 2026).
• Integrated Goods and Services Tax Act, 2017 — Section 16, as amended with effect from 1 October 2023; TRU, CBIC clarification on procurement of reverse-charge services by an SEZ unit in IFSC Gandhinagar; Portescap India Private Limited (Maharashtra AAR).
• Foreign Exchange Management Act, 1999; FEM (Foreign Currency Accounts by a person resident in India) (Seventh Amendment) Regulations, 2025 (October 2025); FEM (Deposit) (Sixth Amendment) Regulations, 2026; RBI FAQs on the FLA return, July 2026; draft FEM (Foreign Investment) Rules, 2026, released 21 July 2026, comments to 31 August 2026.
• The Corporate Laws (Amendment) Bill, 2026, as introduced in the Lok Sabha on 23 March 2026 and referred to the Joint Parliamentary Committee — proposed amendments to Sections 2 and 11 and proposed Section 57A of the LLP Act, 2008.
• Textile Machinery Corporation Ltd. v. CIT (Supreme Court) on splitting up and reconstruction of an existing business; CIT v. Yokogawa India Ltd. (Supreme Court) on undertaking-level computation of the deduction.

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Disclaimer: This article states the position as understood on the date of writing and is for general professional reference, not advice on any specific case. The Corporate Laws (Amendment) Bill, 2026 and the draft FEM (Foreign Investment) Rules, 2026 are proposals and are not in force. Eligibility for the IFSC deduction is activity-specific and should be confirmed against the notified activities and the applicable IFSCA regulations.